Use Accounting Strategy to Win More Financing
Need a bank loan to expand your business? Consider the example of an Orange County husband-and-wife team.
Tracy and Tracy Cracraft--yes, they share the name--found a way to make their 40-employee Rancho Santa Margarita company, TNT Consulting Inc., a good bet for a $250,000 working capital loan from Sanwa Bank late last year. They have another application pending at the bank for twice that amount now.
The couple used cash-basis accounting to generate their federal and state income tax returns and accrual-basis accounting to produce their financial statements for the bank. The strategy--as simple as it is effective--added $200,000 to their bottom line, making it possible to round up working capital from Sanwa.
As outlined in this space in recent weeks, cash-basis accounting allows you to recognize income when received and expenses when paid--or in the case of pension contributions and certain other expenses, when incurred.
Accrual-basis accounting recognizes income when earned and expenses when incurred. Most small-business owners use cash-basis accounting for income tax purposes. It comes as a surprise to many of them that they can switch to accrual-basis accounting when preparing financial statements.
The strategy brings you two big benefits:
* It minimizes profit in the eyes of the IRS, conserving money you might otherwise lose to taxation.
* It maximizes profit in the eyes of your banker, putting you in position to rope in debt financing to expand your company.
The strategy, in short, can spell success for any business owner who needs a lender to finance growth in uncertain times, even as the slowdown in the economy causes banks to lose their appetite for lending to small and mid-size companies.
By any definition, TNT Consulting is a fast-growth company; its revenue hit $1 million in 1998, $2 million in 1999 and $4 million in 2000. The Cracrafts expect to see more than $6 million this year.
But growth can kill a business without adequate financing, especially a service business with big receivables like TNT Consulting. The company sells information technology consulting services. Its customers include PacifiCare Health Systems Inc., WellPoint Health Networks Inc., Beech Street Corp. and Andersen Consulting, now known as Accenture.
That’s a glossy customer list, but like many other high-growth companies, TNT Consulting needs working capital to survive long enough to collect from its customers.
“When we were doing business in excess of $1 million, our accounts receivable were about $50,000 or $60,000 a month, and payroll ran maybe $35,000 to $40,000,” Mr. Cracraft said. “Our customers generally paid in 60 days, but some billings ran 90 days behind. And when you have people working for you who need their paychecks every two weeks, they come first.”
Cracraft applied three times for a $20,000 line of credit at another, bank and three times the bank said no, first because TNT Consulting, founded in 1994, didn’t have three years of operating history. Later it was because the Cracrafts, intent on saving money to buy a house, wouldn’t guarantee the loan with their own savings.
Then a friend introduced them to Jody Chavin, manager of the Thousand Oaks branch of Sanwa Bank, who started them out with a $50,000 line of credit more than a year ago and then upped it to $100,000 early last year, to $150,000 last summer and finally to $250,000 two months ago. Chavin approved the first loan on the strength of the Cracrafts’ personal credit and the subsequent loans on the strength of that plus the accrual-basis accounting underlying their financial statements.
“Without preparing their financial statements on the accrual method, they would never have qualified,” said David Nadel, the Cracrafts’ accountant and a partner in the Encino accounting firm Entous, Entous, Nadel & Co. “Their corporate income tax return--which we did with cash-basis accounting--shows that they broke even for the year, with everything paid out in salary and no money left over.
“But that didn’t give the bank an accurate picture of their profitability. So we did their financial statements with accrual-basis accounting, showing a profit of $200,000.”
The Cracrafts have an application pending with Sanwa Bank to increase their working capital loan to $500,000, and they expect to need more before this year ends. Their financial statements, of course, reflect accrual-basis accounting.
“Cash flow has always been a major issue for us,” Mr. Cracraft said. “It’s been our struggle from day one to cover payroll and our other expenses. We started this business out of our house, and we thought that lenders would help us out just because we were a minimal risk. We were wrong. It’s all about how you manage your relationship with your bank.”
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Recent Financing and Insurance columns are available at https://www.latimes.com/finin. Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.
